HAZEL HENDERSON: WHAT WE CAN DO ABOUT THE PRICE OF OIL

Economist and social critic Hazel Henderson is out with another op-ed piece offering further insight into the causes of the rising oil prices that are turning gas pump prices into financial matters and making drivers crazy.

To begin with, Henderson acknowledges the supply-demand factors imposing significant upward pressure on oil price: “…supply is tight and world demand is rising. In addition, 77% of the world’s proven oil reserves are now controlled by national governments. Political risks abound in the Mid-East, Nigeria and elsewhere. Peak oil is approaching and global warming is bringing a slow end to the Fossil Fuel Age.”

It is a mark of Henderson’s astuteness that she begins here because there are so many self-interested voices in the media insisting the entire problem is supply and demand. These voices assert or imply that people like Henderson, who argue oil futures speculators are having a detrimental impact on price, do not understand oil.

Henderson understands not only oil, but energy in all its ramifications. She has been an energy authority for more than 3 decades: “…the fights between the incumbent fossil fuel and nuclear sectors and the rising solar and renewable resource sectors are heating up, as I predicted in my The Politics of the Solar Age (1981)…”

And Henderson's take is not only her opinion but that of the best experts the House of Representatives could bring to Washington to testify about oil prices: “Expert witnesses to Congress claim that enforcing higher margin payments on oil futures and other tighter rules by the Commodity Futures Trading Commission (CFTC) could cut oil prices in half in 30 days.”

What Henderson and these experts are saying is that the inevitability of rising oil prices has turned oil futures into a good buy for the portfolio. Many investors who would otherwise be buying gold or some such commodity are buying oil and this is having profound repercussions on the price of fuel and all that fuel impacts. Regulations ruling such “portfolio investments” out of oil trading are possible and can help keep the price of this vital commodity in line with its actual supply-demand parameters instead of allowing its price to be inflated by investors buying paper oil.

Henderson closes her opinion piece with comments on 3 popular myths: (1) Other arenas? Regulation on major commodities trading markets is unlikely to drive oil speculators to unregulated trading arenas because such arenas would be too risky. (2) Better to drill? Controlling oil price speculation would likely drop oil prices to $60-$90 per barrel within 30 days whereas allowing new drilling in restricted areas would likely have no measurable impact on oil prices within the foreseeable future. (3) A crash? Controlling oil price speculation would likely drive money to other investments and have a favorable impact on stocks, bonds and the US dollar.

Like so many other wise commentators, Henderson’s opinion is that even after oil prices fall, gas prices should be kept at the $4/gallon level by federal taxes aimed at investments in New Energy infrastructure.

For some of the best oil speculation on the Internet, visit The Oil Drum.

click to enlarge

A Closer Look At Oil Speculators
Hazel Henderson, July 8, 2008 (Ethical Markets)

WHO
U.S. Congress (House of Representatives, Senate); Commodity Futures Trading Commission (CFTC); Congressman Bart Stupak’s testifying experts (Michael Masters, CEO of Masters Capital Management; Fadel Gheit, Oppenheimer & Company; Roger Diwan, Partner, PFC Consultants)

WHAT
The preponderance of authoritative opinions insists steps must be taken to drive speculation out of the oil markets.

Nothing has driven prices up as precipitously as they have risen since speculation took hold. (click to enlarge)

WHEN
- April 2000: Investment in oil futures was 37% of energy trading.
- April 2008: Investment in oil futures was 71% of energy trading.
- Henderson spent 6 years at the federal government’s Office of Technology Assessment during the Ford and Carter administrations of the 1970s.

WHERE
- Hedging by big energy consumers, especially oil consumers, in the commodity futures markets (ex: Chicago’s CME, New York’s NYMEX, London-Atlanta ICE) helps keep prices in check.
- Speculation has come into oil from pension funds, hedge funds, exchange traded funds (ETFs), university endowments and large institutional investment managers.
- Hedging and speculation have been inadequately policed by the CFTC between 2000 and 2008.

WHY
- As supply-demand factors become more significant in energy markets, the struggle between Old Energy and New Energy becomes more intense.
- Peak Oil is a growing reality.
- With ¾ of all oil reserves held by government-owned oil companies, much oil supply coming from dangerous regions, much oil requiring more expense to obtain or refine and with global climate change making the emissions from oil production and use more burdensome, there is a natural upward pressure on prices.
- Hedgers – as opposed to speculators – need oil to operate. (Ex: Southwest Airlines’ savvy speculation has kept it out of bankruptcy while its competitors are falling like leaves in autumn.)
- Speculators are looking g for “alpha” (higher than market average) returns.

Click to the CFTC website and more on CFTC reforms.

QUOTES
- Henderson: “The oil companies in the past 4 years have already stockpiled another 10,000 permits to drill on public lands, on top of the 28,776 permits they have already, only 18,954 of which have been activated. The US Department of the Interior reported in May 2008 that the US public ‘had been deluded into believing that large tracts of oil and gas are off-limits, whereas only 38% of oil and 16% of gas areas are excluded from leasing.’”
- Henderson: “…the public interest also demands that oil companies use their piles of cash to invest directly in the most cost-effective new energy sources now growing at double digit rates around the world. These include wind power, solar photovoltaics sprouting on rooftops in many countries, solar thermal concentrator power plants now dotting the desert Southwest in the USA, Spain and other countries. Together with unexploited geothermal and ocean energy, these Solar Age energy sources are already delivering electricity to homes and businesses worldwide. And all those pension funds should also be investing in all these new energy sources to assure the future financial security of their beneficiaries, rather than playing as short-term speculators. Socially concerned investors, employees and citizens should hold the managers of their pension funds to higher standards to foster the transition to the Solar Age.”

Full Disclosure: Henderson's Ethical Markets is a NewEnergyNews sponsor.